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The Impact of an Exchange Rate Realignment on the Italian Trade Balance: Euro vs. National Currency

Bagnai, Alberto | Ospina, Christian Alexander Mongeau

Applied Economics Quarterly, Vol. 60 (2014), Iss. 4: pp. 273–291

2 Citations (CrossRef)

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Author Details

Department of Economics, Gabriele D’Annunzio University, viale Pindaro 42, 65127 Pescara (Italy) and International Network for Economic Research (INFER).

a/simmetrie – Italian Association for the Study of Economic Asymmetries, Rome, Italy.

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It is frequently claimed that the current EUR/USD exchange rate is too high and that a depreciation of the EUR against the USD would help to relieve the Eurozone economy from its current state of persistent crisis. Evidence provided by the a/simmetrie annual econometric model suggests that this claim is unsupported by the data, at least as far as the Italian economy is concerned. In fact, the size and sign of the trade elasticities show that the increases in net exports towards non-Eurozone countries, brought about by the depreciation of the euro, would be offset by an increase in net imports from Eurozone countries, brought about by the increase in Italian domestic demand. To put it simply, in the event of a depreciation of the EUR, the Italian economy would not only suffer higher energy costs (because of the depreciation vis-à-vis OPEC countries), but would also spend in the Eurozone core much of the money it earned in the US, Japan, and the emerging countries, with a net effect likely to be almost zero or negative in the first three to four years.

JEL Classification: F14, F17, F31, F32, P51